A federal indictment alleging that two City Council staffers stole money from a city-funded community organization could be evidence of the lax oversight of the council’s expenditures of millions of dollars each year on pet projects.

The indictment is an unwelcome development for Speaker Christine Quinn, whose mayoral ambitions were set back by the recent disclosure that the council hid money behind nonexistent organizations to create a slush fund that the speaker could use to fund favored organizations. While Ms. Quinn has acknowledged that the council’s process for funding community groups is flawed, she has insisted that public money hasn’t been squandered. The indictment, if proved, would undermine that assertion.

Prosecutors yesterday charged two staffers with diverting tens of thousands of dollars intended for schoolchildren to the bank accounts of friends in the country of Jamaica and the re-election effort of their boss, Council Member Kendall Stewart, who represents a section of Brooklyn that includes the Flatbush neighborhood.

The indictment alleges that some $145,000 of the $356,000 that the city provided to an organization called the Donna Reid Memorial Education Fund were stolen during the last three years. About $14,000 that the fund received from the council last year, during Ms. Quinn’s tenure, had been routed through two phantom nonprofit organizations listed in the city budget, according to the indictment.

The case also raises questions about whether agencies under Mayor Bloomberg are adequately reviewing the grant applications of organizations that receive money from the City Council. The Donna Reid Memorial Education Fund had initially been rejected for funding in 2004 by the city’s Department for the Aging, after the agency discovered the group’s address was the same as that of the council staffer who was soliciting the funds, the indictment states. Yet shortly after, another city agency, the Department of Youth and Community Development, decided to approve funding the Donna Reid fund.

A citywide database for contracts, known as Vendex, is intended to prevent just that sort of mix up, by allowing agencies to share concerns about recipients of city funds. The Vendex entry for the Donna Reid fund states that there are “no advices of caution known” about the group, suggesting that the aging department did not enter what it had discovered into the Vendex system. A spokesman for the aging department, Christopher Miller, declined to comment.

The aging department did at the time pass on its concerns to the city’s Department of Investigation, an official briefed on the probe said. The official, who asked not to be identified, said the information was not entered into the Vendex system in order to keep the investigation private.

A spokesman for Mr. Bloomberg, John Gallagher, said that “since these issues came to our attention weeks back, we’ve been working to further strengthen oversight. As the facts continue to come in we will take whatever additional steps are warranted to increase checks and balances and fiscal controls.”

In the budget approved last June, the group was slated to receive $18,500 to fund block associations, provide senior citizens with food, and enroll youths in a computer program. The allocation was made at the request of Mr. Stewart and another council member, Lew Fidler.

One of the staffers indicted yesterday, Asquith Reid, was the chief of staff to Mr. Stewart. The Donna Reid fund is named after a daughter of Mr. Reid’s. Mr. Reid at one point served as the fund’s president, according to testimony delivered before Congress in 1997. Mr. Stewart in January testified before a grand jury investigating the use of council funds and cooperated with investigators, a spokesman, Michael Roberts, said. The council member did not know that his chief of staff headed the Donna Reid fund, Mr. Roberts said.

Yesterday’s indictment alleges that Mr. Reid used about $3,000 of the embezzled money to purchase campaign literature for Mr. Stewart and that another $18,000 went to a political club headed by Mr. Stewart. Other money from the Donna Reid fund was cashed by a second defendant, Joycinth Anderson, who served as Mr. Stewart’s liaison to elderly constituents, according to the indictment.

Mr. Reid is accused of also sending $31,000 of the organization’s money to friends and relatives in Jamaica.

The two face charges of conspiring to commit mail fraud and launder money. Mr. Reid also faces charges of witness tampering for what prosecutors say was an attempt to convince two witnesses to lie before the grand jury.

A lawyer for Mr. Reid did not return a call for comment and a lawyer for Ms. Anderson couldn’t be reached.

Asked at a press conference yesterday whether it was a crime to insert the names of fictitious groups into the city budget, as the council did, the U.S. attorney in Manhattan, Michael Garcia, said it “depends on the facts and circumstances of the case, so I can’t answer it.”

The larger investigation into the council’s financing of community organizations, which is being conducted by Mr. Garcia’s office and the Department of Investigation, will continue, Mr. Garcia said, adding, “We’ll see where it leads.”